Two-thirds of momentum index changes in just one day

Summary: What if your “index fund” changed 67 per cent of its holdings overnight? That’s exactly what just happened with the Nifty 200 Momentum 30. This isn’t your slow-and-steady Sensex—momentum investing plays by a different rulebook. It’s fast, aggressive (and emotionally taxing). So, should you invest in it, and, if so, what should be the allocation?

The Nifty 200 Momentum 30 Index just did something dramatic.

As part of its scheduled reshuffle—done every June and December—the index has replaced 20 out of its 30 stocks. That’s a churn rate of nearly 67 per cent.

And this isn’t just about names on a list. This reshuffle is expected to move nearly Rs 16,000 crore worth of trades as passive funds tracking the index adjust their portfolios.

So, why does a rule-based index change so drastically in one go? And more importantly—should you even be chasing momentum in your own investments?

What is the Nifty 200 Momentum 30 Index?

This is a “smart-beta” index. Unlike traditional indices that simply track the largest companies, this one selects stocks based on their recent performance. Smart beta indices select stocks based on specific rules—like momentum, value, or quality.

Here’s how it works:

• It starts with the Nifty 200 universe.
• From there, it picks 30 stocks with the highest momentum scores, calculated using six-month and 12-month price returns, adjusted for volatility.
• The index rebalances twice a year—in June and December.
• No stock can exceed 5 per cent weight, and no sector can exceed 25 per cent, to limit concentration.

Not all index funds are created equal

When we recommend index funds to new investors, we usually mean the Nifty 50, Sensex or Nifty 500—broad-market trackers that are low-cost, low-turnover and simply follow the largest companies in the country.

Those are stable, long-term investing tools. Their appeal lies in simplicity: minimal churn, decent diversification and predictable behaviour that mirrors the overall market.

But the Nifty 200 Momentum 30 Index, while technically an “index”, behaves very differently.

• It doesn’t hold steady giants—it chases what’s been rising.
• It changes the holdings in the index every six months.
• It doesn’t reflect the whole market—it selects a fast-moving subset.

In short, momentum funds may look like index funds on the outside, but they’re active in spirit. And that’s not a bad thing—as long as you know what you’re getting into.

So, don’t buy a momentum ETF or fund just because it has “index” in its name. Understand that this is a very different ride, and it's not for everyone.

Because momentum strategy comes with a cost.

Momentum: High returns, high volatility

Why momentum works

Essentially, the index is designed to ride the strongest trends in the market. But since momentum fades quickly, the index is built to swap out laggards fast and bring in stocks leading the next leg of growth.

Over the long term, momentum has delivered solid performance. Since April 2005, the Nifty 200 Momentum 30 Index has annually returned 19.9 per cent, compared to 14.7 per cent for the broader Nifty 200.

It has also delivered better risk-adjusted returns, with a Sharpe ratio of 0.18 vs 0.13 for the broader index. Sharpe ratio is nothing but a measure of how much return an investment gives you for the amount of risk you’re taking—higher is better.

Why does it work? Because markets tend to trend, and investors often overreact to good news. Momentum capitalises on this by buying winners and holding them until the trend breaks.

But it’s high risk

Momentum also comes with more bumps along the way.

• Annualised volatility is 6.90 per cent, higher than the 6.32–6.65 per cent range seen in broader indices.
• It’s prone to steep drawdowns, like in 2008 or more recently between September 2024 and March 2025.
• In such periods, the index struggles to keep up as its prior leaders collapse and new trends take time to form.

So, while momentum can be financially rewarding, it’s also emotionally expensive. You have to be prepared for periods when it underperforms.

Churn, taxes and real-world costs

Momentum’s fast-changing nature doesn’t come free.

• The portfolio turnover ratio of Nifty 200 Momentum 30 funds was a staggering 124.24 per annum as of May 31, 2025. Portfolio turnover ratio tells us how frequently the fund or index changes its holdings. Higher turnover means more trading, which potentially leads to higher costs.
• Higher churn translates to higher execution costs, which increase the fund’s expense ratio—averaging 0.39 per cent, compared to 0.18 per cent for Nifty 50 index funds.
• Tracking error (the difference between the index's return and the return of the fund that’s trying to copy it) is also higher. Over the past year, funds tracking this index have seen an average tracking error of 0.27 compared to just 0.08 for Nifty 50 index funds.

And in choppy markets, there’s another cost: buying high and selling low. Momentum sometimes picks a stock whose run is about to end soon. Alternatively, it can exit a stock right before it rebounds.

Who should consider momentum funds?

Let’s be clear: this is not a core investment.

If you're new to investing or prefer stability, start with broad, low-cost index funds.

But if you’ve already got a solid core portfolio and want to experiment with style diversification, momentum could be a satellite strategy with no more than 10 per cent of your portfolio.

You should consider it only if:

• You understand what factor investing is.
• You’re willing to sit through periods of underperformance.
• You see it as a long-term strategy, not a short-term play.

This article was originally published on July 21, 2025.